The bad news is there's nothing you can do, they have every right to do this, you agreed to it in the terms of service.

The worse news is they take their sweet time resolving these issues, and have been known to just cancel your account and not return your money...(sometimes refunding the purchasers, depending on if there were complaints).

Since you were jsut selling items of a questionable nature you should be able to recover your funds. Since you weren't breaking any laws or regulations they really can't keep your funds. No one is contesting charges either so they don't have much ground to stand on. Sure you were selling products they might not like but they can't freeze your assests because of it. Hell they can't even prove the money in the account was from the sale of those questionable items. I had a co-worker who was in a similar situation and Paypal froze his account with around $3300USD. A letter from a lawyer quickly got his funds wired to his bank account though his account was still terminated. You might also consult a lawyer and get the several grand they owe you.